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Risk Fraud & Compliance

US Treasury issues final rule outlining ‘beneficial ownership’ reporting requirements

Brett Wolf  Regulatory Intelligence

Brett Wolf  Regulatory Intelligence

The US Treasury Department's anti-money laundering unit recently issued a final rule that reveals which types of legal entities will be required to report information on their true, or "beneficial" ownership to Treasury

The final rule is an attempt by the US government to lift the veil of anonymity offered by shell companies that has long been abused by criminals, corrupt officials, and others.

Notably, the final rule does not address the issue who will have access to the beneficial ownership data, a vital point of interest for financial institutions that already are required to collect beneficial ownership information from customers as part of their customer due diligence (CDD) obligations and could use the reported data to verify it.

The rule, issued by Treasury’s Financial Crimes Enforcement Network (FinCEN), “will make it harder for criminals, organized crime rings, and other illicit actors to hide their identities and launder their money through the financial system,” Treasury Secretary Janet Yellen said in a written statement.

During recent congressional hearings, a senior Treasury official repeatedly described the push to create a beneficial ownership database as one of Treasury’s top regulatory priorities. “For too long, it has been far too easy for criminals, Russian oligarchs, and other bad actors to fund their illicit activity by hiding and moving money through anonymous shell companies and other corporate structures right here in the United States,” said Acting FinCEN Director Himamauli Das in the FinCEN announcement.

FinCEN’s 330-page rule, issued pursuant to the Corporate Transparency Act (CTA) and part of the Anti-Money Laundering Act of 2020, will not come into force until January 1, 2024. Some experts have expressed skepticism that FinCEN will have its planned database — the so-called Beneficial Ownership Secure System (BOSS) — up and running in time to begin receiving, processing, and appropriately disseminating the massive volume of data it will receive on millions of entities.

“FinCEN continues to develop the infrastructure to administer these requirements in accordance with the strict security and confidentiality requirements of the CTA, including the information technology system that will be used to store beneficial ownership information,” the Treasury bureau said in its summation of the rule.

Entities affected by the rule

FinCEN noted that companies required to report beneficial ownership information under the final rule will include (subject to the applicability of specific exemptions) limited liability partnerships, business trusts, and most limited partnerships, in addition to corporations and limited liability companies (LLCs), “because such entities are generally created by a filing with a secretary of state or similar office.”

FinCEN also noted that other types of legal entities, including certain trusts, “are excluded from the definitions to the extent that they are not created by the filing of a document with a secretary of state or similar office. FinCEN recognizes that in many states the creation of most trusts typically does not involve the filing of such a formation document.”

Under the final rule, a beneficial owner includes anyone who, directly or indirectly, either exercises substantial control over a reporting company, or owns or controls at least 25% of the ownership interests of a reporting company. The rule further outlines a range of activities that could constitute substantial control of a reporting company.

Access to reported information

The rule is one of three that FinCEN plans to issue pursuant to the CTA. A second rule — which has not yet even sought public comment — will establish who can access the beneficial ownership information that FinCEN collects in its database, for what purpose it can used, and what safeguards will be in place.

After the reporting and access rules have been addressed, the CTA requires FinCEN to issue a third rule which will amend its customer due diligence (CDD) rule — under which financial institutions are required to collect beneficial ownership information — to take the new rules into account.

The bottom line is that it will be quite some time before financial institutions and their compliance and anti-money laundering professionals know how FinCEN’s rulemaking activity pursuant to the CTA will affect their CDD requirements. Before then, there will be multiple opportunities for institutions and trade associations to comment as FinCEN develops the two remaining rules.